>> we are insolvent. >> it is happening from coast-to-coast. >> the city that kept issuing debt. >> bankrupt cities. >> stockton is falling apart. it is a horrible thing to see. >> sinkholes of waste. corruption. and crime. >> what words would you use to describe the financial situation? >> oh, hopeless. >> hopeless? >> hopeless. >> who is to blame? >> these were all his ideas on the taxpayers trusted him. >> who will have to pay? >> the salaries and benefits have to be renegotiated. >> you bet. >> why has that not happened yet? >> what is the fix?
>> when we come together as a city there is nothing we can't accomplish. >> fox news reporting cities going broke. reporting from wall street in new york city here is bret baier. >> this hour we will take you inside an alarming trend. cities that have slid deep into debt. even bankruptcy. new york is not on the list today but for a number of other reasons we begin our report from this spot, america's financial nerve center. the first reason is simple. some of the nation's most desperate cities are in trouble because of the millions they have borrowed from wall street. we saw that 171 miles from here in a city buried under decades of debt. >> harrisburg, pennsylvania, is the capital of the keystone state. you would think it had been run by the keystone cops. >> what exactly is the fiscal situation in harrisburg now? >> well, number one we are insolvent. >> dan miller is harrisburg's controller.
>> my office is projecting that we would have a $15 million deficit this year and i think we are just going to struggle from pay check to pay check. we have $1.6 million. we have a health insurance bill that needs to be paid and our payroll every two weeks is a million dollars. i mean there you go. if we make payroll next week and pay that bill we have no more money. a bleak situation. >> bleak. that about captures it. harrisburg is deep in hop to wall street and can't make the payments on millions of dollars on bonds. it has gotten so bad harrisburg doesn't even have a credit rating any more. >> it is difficult to sell homes, people aren't moving into the city. businesses don't want to locate here. >> how did it come to this? the story begins in november of 1981 when voters elected democrat steven reid mayor. he would remain in office 28 years, a tenure marked bay public building boom, financed bay series of big debt deals with wall street. the first in 1986. heaharrisburg borrow $390 milln
to build a hydroelectric dam and then regulate the waterfront. reid could move ahead with the waterfront project. part of his vision to turn harrisburg into a national tourist destination that included a new $1.6 million baseball stadium to lure a minor league franchise to town. years later when the senators threatened to jump to another city, harrisburg issued bonds to buy the team. its price tag? $6.7 million. then there was reid about's attempt at a wild west my you see yum. he spent $8 million over 16 years on artifacts from six-shooters to doc holliday about's cane. much of the collection is still stored in this warehouse. the museum never opened.
the national civil war museum did hope in 2001 at a cost of more than 30 million. >> you have all that together in one town, wow, you are a nationally scaled national class tourism attraction. >> democrat linda thompson was on city council from 2002 through 21s 2010. >> these were his explanations when was challenged ton. >> but the challenges really wouldn't come until harrisburg's finances collapsed under its most expensive falling. >> this incinerator was the biggest problem for criminal them. in never worked like it was supposed to. it has burned up hundreds of millions of dollars and some people now call this the incinerator from hell. originally built in 1972 before reid took office the plant was supposed to generate profit by
charging fees to burn garbage. it didn't work out that way. mechanical problems shut it down. pa multiple times.ultiple >> the city had to decide do we incur more debt to get the it running again or just sell it and get rid of it. the city enured mor incurred m. in 2003 there was $100 million of debt outstanding. within four years there was $326 million. on an insin rater that probably could carry $100 million if it was operating properly. >> that debt crippled harrisburg. which unkovich says scrambled for cash whereever it could find it. for example he says to make extra money the city started overcharging sewer customers for administration costs while
it let century old pipes collapse. >> it is not unusual to have the sinkholes directly related to incurring the debt for the incinerate. used the money from the incinerator bonds for other projects. how was he able to do that? >> by moving money around in different funds. i can't tell you what money he moved where other than he did. so for example if you want to start a museum, rather than going to city council and put $500,000 in the budget you issue bonds for an incinerator and take a portion to get money for a purpose that he he may not be able to get azoved if he just goes through the normal budgeting process. >> that doesn't seem legal. is it? >> i don't know. it is certainly questionable. >> as a member of city council you voted for the incinerator debt? >> yes, i did. >> that was a bad idea. >> as it was sold to us, no. we hired our own professional
consultants who told us it would pay for itself. >> you regret that now? >> i egreet that wi regret than the consultants. >> no authority fees, fund,s funding or income shall be applied to purchase artifacts or to benefit any city museum or related projects. >> yeah. >> the situation had gone from fiscal tragedy to farce. while the council scuddled the hall of fame next door to the baseball stadium the city did go along with a face lift to the ballpark itself which would send taxpayers deeper in debt. follow this one. harrisburg sold the senators at a $7 million profit but then turned around and borrowed $18 million for stadium
upgrades. >> do you take some of the blame here? >> my responsibility started back then. i began to sound the alarm about this leadership and the final responsibility i took on was i ran against him and unseated h him. >> a private citizen since 2010, reed did not respond to multiple interview requests over several weeks via phone and e-mail. so we dropped by his house. and the building where he has an office. >> he is not in the office right now. >> within hours reed contacted us by e-mail. he claim the his various tourism initiatives boosted harrisburg's economy and that he did nothing wrong to pay for them. as for the incinerator reed noted it "was approved by all governing bodies." he also wrote he had a workable plan to wipe out the incinerator debt but that "city council stopped the process dead in its tracks." he turned down our request to
speak to us on camera? >> he was likeable and a smart man and taxpayers believed in his leadership and they trusted him. >> and he left them with a mess. the question now, how to deal with it. the state appointed receiver put together his plan to pay back the debt by, mock other things, raising harrisburg's earned income tax and leasing out some of its parking garages. mayor thompson got behind that plan. controller dan miller and the city council, however, don't think harrisburg residents should be the only ones making concessions at this point. they want a bankruptcy court to sort it all out. >> what do you say to people who say that is a copout? >> the reality is you can only get so much blood from a turnip. >> this man doesn't want to hear it. dominik fred rico. the ceo of insured guarantee which has insured the harrisburg bond os. theyville to pea off th will he
investors. >> on the bond deals even if the project goes kaput that the government is still on the line to pay what is due? >> they make us an absolute promise to pay. full faith and credit is the term that is typically used. >> so they are on the line for it. >> if you give me your full faith and credit are you on the line? >> of course. >> okay. >> last october the council filed for bankruptcy but its petition was rejected because thompson the mayor refused to sign it. now, miller is running against her in next year's primary. dave unkovich on the other hand is done tending to harrisburg. resigning in frustration. >> we are at a point where you literally could not kick the can down the road. so broke than you just need to deal with the problem. >> now. >> yes, now. >> up next, the battle over pensions and benefits. fox business network's lou dobbs with that story, after the break.
welcome back. as you have seen, cities with big dreams and big bills have come here to wall street for the cash to finance them. but even more towns are going broke not by issuing bonds is but by issuing promises to public employee unions. that story has a new york angle, too. fox business network's lou dobbs explains. >> but it is a good natured sort of labor battle. it was in 1935 that president franklin roosevelt made it easier for workers in the private sector to create unions. when signed the wagner act he see he meanted and deepened political ties between organized labor on the democratic party. >> it doesn't pool enthusiasm for picketing. >> even fdr didn't think public sector unions made any sense. >> collective bar gaining is
different for public workers because their boss is really on their side. >> lies extensively on the roots of america's economic problems. >> they don't want to pay the union mihms too much because it comes out of their own pockets at ford, but that is not true of the government. >> strikes by public employees would be quote the unthinkable and intolerable. but it was within a couple of decades that democratic heirs decided the political upside of public sector unions was worth the risk. the euro caucuse eureka momentd right here in new york city. municipal workers granted the right to bargain collectively. three years later those public unions organize today's reelect
him. wagner's unexpectedly strong showing caught the attention of another democrat worried about reelection. president john f. kennedy. >> he sees how this carried wagner to victory and issues an executive order allowing for the unionization of federal employees. state and local governments picked this up as a cue and you have the rapid growth from there on of public sector unions across the country. >> historian fred siegel of the manhattan institute says the new unions almost invariably worked to elect democrats. >> pay increases and pension increases and healthcare increases. meanwhile the union takes some of the money it gets from the city and invests in local elections. so it continues to elect people who will give the unions what it wants. >> and they also became a political force unto themselves. >> you can't act without their cooperation. >> that is because when elected
officials didn't cooperate the public sector unions that fdr warned about declared those unthinkable strikes. the most memorable case, the summer of 1975 when new york was close to bankruptcy. sanitation workers let garbage pile up in the streets while laid off police marched and shut down the brook le brookly. public employee unions demonstrated nationally when they helped senator ted kennedy challenge to a sitting democratic president they didn't like, jimmy cart. the public sector unions become the get out the vote machine that the old democratic party machine once was. >> carter was renominated but lost to ronald reagan who had the is support of at least one public is sector union, the air traffic controllers. that wouldn't last. months later the controllers rejected a government contract offer they went on strike.
but that was not allowed under federal la president regan fired them all. >> but we cannot compare are labor management relations in the private sector with government. government has to provide without interruption the protective services which are government's reason for being. >> it is not surprising public unions ally with democrats as providence rhode island fire department union president paul dowdy. >> if you look just generally at the republican party. they believe in a smaller government. as a government worker i don't know necessarily agree with that. >> by the 2* 2008 election, a former community organizer with long ties to one of the largest government employee unions of all -- >> i spent my entire adult life working with sciu. >> a financial crisis would
catapult their man to the white house. but it would also bring those dire warnings about public sector unions from fdr's era. >> union. >> yes! >> back into focus. >> and one other thing, bret. in 2009, public employee unions absolutelily eclipsed the membership of private sector unions. >> thanks a lot. we will see you a bit late. up next, i go across the country to one of those
♪ get your kicks on route 66 >> on old route 66, san bernardino was known as the last stop before l.a. ♪ san bernardino >> with freeways and major railway station it was the ideal hub linking the ports of los angeles and long beach out to the rest of the country. san bernardino symbolized the promise that economic growth held for middle class america. it was even the location of the first mcdonald's. but today, this city of around 210,000 has a shortfall of $46 million. over a quarter of its entire budget. unable to fund enough cuts to close the gap, san bernardino august 1 filed for bankruptcy. >> you called this a stain on the city? >> oh, yes. >> patrick morris has been mayor of san bernardino since 2006. >> how did sweard ge san bernat
into the predict ament? >> it was a perfect storm economically when this hit in 2006 and 2007 the bottom fell out. >> in the perfect storm, morris says san bernardino property values dropped by 65%. seven car dealerships shuttered and the city lost tens of millions of dollars of sales, income tax and tax receipts. >> we have major cash flow issues. >> he names a great recession. every city in california has been through the great recession. >> republican state assemblyman mike mor morrell rejects morri' perfect storm analogy at least that a sear reof factors came together to devastate the city. >> they had five years of warning that this train was coming down the track. >> that is morell's preferred
metaphor. a freight train fueled by public employees salaries and benefits and it hit town right on schedule. >> approximately 75% of the budget goes towards fire and police officers. they are not going to be able to pay those pensions nor are the salaries they have been paying. >> we have historically in the city been remarkably generous with our labor contracts. >> generous, indeed. in 2010, a san bernardino $317,000rgeant maided 3 h in a city where the average household income is less than $40,000. but it is not just the top salaries that have brought down san bernardino. it is the average ones. >> san bernardino firefighters are making about $130,000 a year. police around $95,000. with pretty generous pensions as well. >> did anybody say hey, you know what, we are not going to be able to afford this down the
road? >> those are very problematic agreements that were made at a time when life looked rosy. >> morris admits it has been in good times and bad that san bernardino's public unions had powerful influence over the politicians. the politicians they help elect. morris says that is just the way its. >> in a blue collar city as old as we are unions have a presence in terms of funding for candidates for are city council and they are present at the table during labor negotiations. >> those negotiations in some cases have bound san bernardino to pay employees just as much even after they retire. >> that is not going to work. it is not going to work. >> you cannot retire people at the age of 50 years with literally full pay and bridge their health benefits until medicare. >> the salaries and benefits you are saying have to be renegotiated. >> you bet. >> why has that not happened
yet? >> it will happen under the guidance of chapter 9. >> in other words, bankruptcy court. but public is sector unions are saying not so fast. they point to state precedence that suggests their pensions are are untouchable. however, morris, a former judge believes that in this unprecedented crisis the courts will allow cities to it modify at least some of their contracts. meanwhile, he is dealing with the day-to-day trials of a city gone belly up. >> now, you don't really have any credit. >> that's right. >> cash for things. >> carry.d kari. >> you vendors who leased equipment who may way to to take that equipment back. >> yes. >> and that is a daily thing? >> we deal with it daily. >> bankruptcy in the short-term is the easier thing to do but the long-term you affect lending condition, housing conditions and jobs. >> and that morrell says will
make things worse for the already beleaguered citizens of san bernardino. >> were there other options? >> there always options. the city could have balanced the budget with a massive cut of services. when you are looking at a city that already cut 20% of its staff that is a really difficult choice to make. >> san bernardino's modernistic dark glass city hall completed in 1972 was once a sign this town was look to the future. today, however, the last stop on route 66 may be on its last legs. >> coming up, the biggest local government bankrupt icy in u.s. history. and it is not in california. (phone ringing) good afternoon. chase sapphire. (push button tone) this is stacy from springfield. oh whoa. hello? yes. i didn't realize i'd be talking to an actual person. you don't need to press "0," i'm here. reach a person, not a prompt whenever you call chase sapphire.
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it took some doing. greed, income p incompetentencd ol >> bank run to the tune of 4 billion. >> what words would you use to describe the financial situation in jefferson county? >> hopeless. at this junk fuhr. >> hopeless? >> hopeless. >> jimmy stevens is jefferson county's district three commissioner. he was elected after the crisis began. >> how did it stop to go after the rails? >> they attempted to build a cadillac when a chevrolet would have worked as well. >> this is not a tale about cars but sewers and the sort of mess that seens to the surface when local politicians with big ideas get mixed up with wall street bankers looking for big fees. a financial sinkhole in a swamp of corruption. it begins back in 1996.
jefferson's sewer system was leaking raw sewage into rivers and streams and the county signed a federal consent decree to fix the problem. the costs huge, estimated at between $250 million and about a billion dollars. >> where did the county get the money to undertake such a massive project like this? >> if went to investment bankers, went to the bond market and made their pitch and it was underwritten and sold as a good investment. >> at this facility alone the county spent more than $200 million on improvements and repairs earning jefferson county the nickname of having the taj mahal of sewer systems. >> i think in a lot of ways this facility is emblematic of the problems the system has. >> david denar has been in charge of running the jefferson county sewer system since 2008. >> the building we are in now what does it do? >> this is a peak flow pump station. >> it was built in 2004.
soon thereafter problems began. >> we had to spend $35 million in repairs. >> what did the building cost originally. >> 50 million. >> and had to spend $30 million to repear it? >> to put it in regular operating condition, yeah. >> when did go wrong there? >> the people did not operate on a budget and used local engineers to manage a problem that required a lot more expertise than was here. >> some of the sewers green lighted were not even included in the consent decree. how did that happen? >> jefferson county won'ted to bore are a super sewer underneath to get to area that would be developed. when they got to the point the outcry from environmental or rate payer groups was so loud they killed the project outright, leaving jefferson county with the tunnel to no where. when it became clear the county wouldn't be able to make the payments on its bonds officials
went back to wall street looking to refinance. >> original debt service represented $2.4 billion. 98% of that was fixed debt and investment bankers said we can go to a variable rate interest and add derivatives to that to synthetically make that lower. >> the new instruments that wall street had generated were so complicated that the average person even the finance person could not understand it. >> tony patellas is the jefferson county manager. he said those instruments exploded jefferson county's debt without any one realizing. >> it we were overextended by 85% and the folks that insured our bonds should have known better. >> when the market crashed in 2008 jefferson's bonds dropped to junk, allowing lenders to demand payment in full. >> they called everything in and we were unable to pay. today, jefferson county is debt
over $4 billion. we are in bankruptcy. the largest bankruptcy in the history of a local government in the united states. >> did wall street really take jefferson county for a ride here? >> i leave they did. >> a federal criminal investigation of the sewer deal found that was the case. but wall street got a number of help from a number of people with their hands out. >> we had 21 people that either plead guilty or went to prison. commissioners, employees and contractors. >> that included former commissioner and birmingham mayor larry langford. sentenced to 15 years for accepting thousands of dollars in cash and gifts from one of the bankers. former commissioner gary white. ten years for accepting bribes from an engineering company that worked on the sewer lines. mary buckaloo probangs after lying to the grand jury. chris mcnair serving five years for bribery and conspiracy to solicit bonds. bond underwriter jp morgan
settled with the sec, paying the county $25 million and the sec and a. the bank alleged to have friends of jefferson county commissioners. >> there was definitely malfeasance in the whole use of the swaps et cetera. >> but the president and ceo of assured guarantee which reinsured. so sewer bonds says the sins of wall street and corrupt politicians shouldn't let jefferson county off the hook. >> i didn't vote for that project, they did. >> what really steams federico is that they killed a deal that would have avoided bankruptcy. bond holders offered to forgive a billion dollars of the sewer debt if state lawmakers allowed the county to raise taxes to pay the rest. now, assured guarantee has to pay up. we should work together.
>> at a certain point when you can't meet your financial obligations and the settlement that we had was getting farther he away instead of closer to us we had no choice. >> is it a cautionary tale for other counties across the country? >> absolutely is. you have got to live within your means. >> welcome back. lou dobbs from the fox business network. the president of assured guarantee said his company was going to be able to be fine even in the current environment. if there was a lot of defaults would it be like a domino effect in a a worst case scenario? >> if it reached co con tagion levels that would be a l calamity. >> how bad could a municipal bankruptcy be for the people who live there? worse than you c
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your pockets for me. >> and the people that live here. pretty much life and death. >> if the officers disappear the gang bangers will be here in a heart beat. >> since 2010 the city has had to slash a quarter of its police force because they borrowed more than it can pay and promised more to unions than it can deliver. police can't respond to all 911 calls and that meant more crime. serious crime. >> we have seen a spike in the violent crime and in the homicides. >> stockton is falling apart. it is a horrible thing to see. >> fred siegel of the manhattan institute has written extensively about cities like stockton going broke. >> stockton is a city in the midst of terrible social breakdown. not justice cal collapse but social collapse and the two are intertwine. >> stockton in the middle of the fertile farmland of
california's central valley. also an inland seaport connected to san francisco bay. a navy base here anchored a bluent 20th century blew collar economy. but by the 1990s, the base and many of the factories were gone. stockton's signature waterfront had become a place to avoid. an johnson was on the city council then. >> the council and mayor at the time said we need to fix this problem in the heart of our city. >> with taxpayers' money and a seemingly limitless ability to issue municipal bonds stockton tried to spend its way back to prosperity. >> it was going to be remade and part of the greater bay area. >> $24 million for a minor league baseball park. $150 million for an 11,000 see the arena. 30,000 per slip for a yacht
marina next door to new million dollars town homes. >> risky and expensive projects but at the same time your city employees were getting extremely generous packages in pay and in benefits. why didn't anybody put up their hand and say wait a minute, this is insanity. >> there was a failure in leadership. they felt that the money would continue to roll in and property values would continue to rise. >> and then in 2008, the stock market crashed. real estate prices plunged. the city was suffering double digit unemployment at the same time property and sales revenue went off a cliff. when the city moved to reduce staffs and trim salary, benefit and pension packages the police union not only resisted. it launched an ad campaign that johnston look as a little short of a threat. >> they put up billboards which said welcome to the most dangerous city in california stop laying off cops. >> we wanted something to grab their attention.
>> bill huddle is the vice president of the president union. >> what about the blood splatter running tally. >> to let everyone know this would cause more crime and havoc and violence in the city. >> totally irresponsible and totally bullying. when you don't have the money you don't have the money. >> last february, stockton defaulted on $32 million in bonds. it declared bankruptcy. the biggest u.s. city to do so. meanwhile. >> we have is to stay locked up. >> folks we spoke to sense that for them life in stockton was likely to get worse. >> when we return, fixing a city that is broke. two democratic may 84s trying to get it done -- mayors trying to get it d
about cities bankrupted and lives shattered by folly, greed and corruption. can any one turn the towns around? meet two democratic mayors trying and aair rently making progress. even cutting union pensions and benefits. >> the private sector is doing fine. where we are seeing weaknesses in the economy have to do with state and local government. >> both parties worry about cities going broke. but they seldom agree on how to fix the problem. >> because i'm sure that the president of the united states is not getting his talking points from the big government union bosses in washington. >> now, torn between the party most powerful supporters the realities of the city budgets. >> they are bumping up against
liberal interest. not enough money for basic services and roads. >> that is the case in san jose, california whose democratic mayor are chuck reid took office in 2007. >> what role did the public sector unions and their contracts really play in your fiscal crisis? >> most of our costs were driven by increasing salaries and pension benefit and those came out of the '90s in the go-go years when we had money. >> the average cost for a police officer and firefighters was $200,000. >> a year. >> what steps did you take to stop the bleeding. >> we cut everybody's pay by 10% starting with me all the way down to it all of the unions. everybody took a 10% pay cut. >> he cut city services, too. but that still left a $115 million deficit. it was time for a desperate measure. or as it became known, measure b. >> what exactly was that? >> measure b was a ballot when
slur to' lou the voters to decide whether or not we are going to ten to cut services or bring down the cost of pensions. >> it would save the city billions over time but voters had to approve it first. that was hardly a slam dunk in a county that vot voted 70% for obama in 2008. re pushed his case hard, demonizing city workers says firefighter robert s api en. >> trying to convince the public things were bad in the city because of employees. in some cases people have been accosted in grocery stores. >> from the firefighters and police officers perspective have you heard the stories they have been verbally abused and treated with scorn? >> there have been some instances of that but the facts are difficult and the facts are we have cut services over and over and over again to fund very expensive retirement
benefits. >> last june despite strong union opposition, 70% of san jose voters, the same number that supported president obama in '08 vote the for measure b. reed got his victory the same day scott walker easily is survived a union led recall challenge. but the san jose democrat bristles at the comparison. >> lots of people tried to draw the parallel with san jose and wisconsin. it is not a good analcy. >> analogy. >> he says he wants to force the union to accept cuts while walker curtailed some of their bargaining rights. >> in san jose we negotiated with the unions hundreds of hours and they are are still an important part of what we have to deal with. >> in providence, rhode island, mayor tavares feels the same way. he took office in 2012. >> i came into office expecting the deficit just not one of the magnitude we found.
>> he acted quickly, notifying all 1934 providence teachers they could lose their jobs come summer. eventually he struck an agreement with the teachers' union that saved almost all of their jobs. and tens of millions of dollars. >> good to see you. >> nice to see you. >> he then approached the police and fire unions and got them to it agree to big cuts as well. >> he said i need your help. i can't do that without you. >> paul dowdy is president of the providence firefighters. >> if you have any solutions that you think will help please i'm open to them. i will do almost anything and that was over a sandwich. >> the unions knew they had to deal with tavares says nicole gelinas. >> they said if we don't vote for this we may get a lot worse if the city goes bankrupt. we would rather give back a little now than a bit later. >> the unions have not yet come around to that way of think
back in san jose. >> no part of measure b will be implement. >> instead, firefighters and police sued claiming measure b is unconstitutional. reed is standing firm. >> what is the one thing that keeps you up at night. >> the long-term fiscal impacts of these problems. spend the money if you have it. if you don't have it, don't spend it. >> we began this hour from spot because wall street is the center of modern finance. but we end here on a different thought. behind me is federal hall. that is where our national government first met after the constitution was is ratified. one of the framers gravest concerns is that the nation could be profoundly weakened if debts run up by the states were not handled in a responsible way. not everyone agreed about what to do then and, yes, the issues are different today but two core ideas of the founders still apply. first, out of control debt can destroy is country's ability to
chart its own destiny. second and even more crucial, in crisis the exceptional character of the american people is the most important asset we possess. that is our program. i'm bret baier. i'm bret baier. thanks for [ male announcer ] this is the land of giants. ♪ home of the brave. ♪ it's where fear goes unwelcomed... ♪ and certain men... find a way to rise above. this is the land of giants. ♪ guts. glory. ram. introducing share everything, only from verizon. a shareable pool of data to power up to 10 different devices. add multiple smartphones to your plan,